Today's strong labour market report for May—showing stronger-than-expected employment and wage growth, and lower-than-expected unemployment—is cementing our call for a rate increase from the Fed at its June 13 meeting. Taken altogether with yesterday's strong reading for private consumption, as well as core inflation hovering just around target, we think there could be further speculation about the Fed accelerating the pace of rate increases from its own suggested path of two more increases this year. We would expect that to give an initial reaction in markets of higher yields and a stronger USD. Our expectation of three more rate increases this year appears to be validated by this report, but given that investors have already warmed up to this idea, the reaction in markets might not be too significant. The risk of disorder in the eurozone and trade war jitters probably mean that the market may not expect this report to prompt the Fed to deviate from a rate-hiking pace of 25 basis points per quarter, as is our current view.

Unemployment rate at its lowest since 1969

Nonfarm payrolls posted an increase of 223,000 persons in May, with net revisions adding another 15,000 to the total tally. This was above the consensus call of 190,000 persons in added employment. According to the household survey, the unemployment rate fell from 3.9 to 3.8 percent, which was lower than expected and the lowest level since December 1969. Wage growth was higher than expected, with a monthly increase of 0.3%, thereby lifting the annual growth from 2.6 to 2.7 percent. In our view, it is somewhat impressive that the labour market is still able to produce this kind of employment growth in this apparent late stage of the business cycle, and it is indicative of a larger degree of slack than one could expect. Nevertheless, the figures also indicate that the labour market is tightening further, with an increasing risk of higher wage growth and inflation ahead.